1. Introduction to Marketing Analytics

2. Outline The new realities of marketing decision making
Marketing Engineering (ME)
The role of models in ME
Allegro exercise

3. Challenges faced by today’s marketing decision makers
Global, hypercompetitive business environment.
More demanding customers served by a greater number of competitors on a global scale.
Exploding volume of data
“We’re drowning in data. What we lack are true insights.”
Need for faster decision making
Information overload and lack of time, yet decisions have to be made all the time.
Higher standards of accountability
Marketing expenditures have to be justified in the same way as other investments.

4. Need for better marketing decision making
Intuitive decision making
Instinct, gut feelings, past experience, established practices;
In a world characterized by rapid change, information overload, greater accountability, etc. intuition is unlikely to generate superior results;
Model- and data-based decision making
Marketing Engineering

5. Marketing Engineering (ME)
“A systematic approach to harness data and knowledge to drive effective marketing decision making and implementation through a technology-enabled and model-supported interactive decision process.” (LRB, p. 2).

6. Marketing Engineering
Marketing Environment
Automatic scanning, data entry,
subjective interpretation
Data
Database management, e.g..,
selection, sorting, summarization,
report generation
Information
Engineering
Marketing
Mental models,
Decision models
Insights
Judgment under uncertainty,
e.g.., modeling, communication,
introspection
Decisions
Financial, human, and other
organizational resources
Implementation

7. Models are the core of ME:
What is a Model?
Models are stylized representations of reality that structure our thinking about how the world works;
Models indicate which factors should be considered and which factors can be ignored;
By focusing on the relevant factors and their interrelationship reality can be simplified;
Models are useful because they facilitate top-down processing (as opposed to bottom-up processing);

8. “No model is true, but some models are useful.”
Issues in using models
assembling an arsenal of models for a domain of interest;
retrieving relevant mental models in a given situation;
being aware of the limitations of mental models (they may overrepresent and underrepresent, or even malrepresent, things);
“No model is true, but some models are useful.”

9. “Sales are a function of advertising”
Types of models
Verbal
“Sales are a function of advertising”
Box and Arrow
Graphical
Mathematical
S = a + b A + e
sales
Advertising
Sales
advertising

10. Response models in the decision loop
Marketing actions
(inputs)
Competitive actions
Observations
(outputs)
Product design,
Price, Advertising,
Selling effort, etc.
Response
Model
Awareness
Preferences
Sales
Environmental
Conditions
Objectives
Control, Adaptation
Evaluation

11. A simple (linear) response model

12. A simple (linear) response model

13. A simple (linear) response model
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.95
R Square
0.90
Adjusted R Square
0.88
Standard Error
Observations 10
ANOVA df SS MS F
Significance F
Regression 1 68
Residual 8
Total 9
Coefficients
t Stat
P-value
Lower 95%
Upper 95%
Intercept
33.8
0.0
Advertising
2.1
0.3
8.3
1.5
2.7

14. How to build a model Specify the model Calibrate the model
Variables (which ones to include)
Relationships, interactions, dynamics (how they are linked)
Calibrate the model
Statistical estimation with real (historical) data
Experimentation
Managerial judgments
Validate the model
Face validity (does it make sense?)
Global fit (R², model fit)
Variable significance (correct signs, t-tests)
Apply the model
Ease of use
Usefulness

15. Resource allocation "smart sheet" exercise
Allegro
Resource allocation "smart sheet" exercise
Introduction
Following are two business plan spreadsheets for the same company, Allegro. You have just been assigned to be the brand manager and must formulate a plan for next year. As you will see, the projected profits for 2006 are higher than the plan for To make a good impression, you need to develop a plan that will deliver higher profits in Your job is to use each spreadsheet to determine the optimal level of price, advertising, and selling.
How to use this spreadsheet
Start with the Simple spreadsheet. It is a traditional spreadsheet. Use this as an aid to help you think about optimal spending levels, and how this might affect market shares and net profits.
Go to the second spreadsheet. It is a "smart" spreadsheet where projected market share is a function of price, advertising and distribution spending. If you change the planned price, sales (and contribution margin) will change.
Not surprisingly, as you lower price, volume increases, but the contribution margin decreases. As you increase advertising or selling effort sales volume increases. These response functions came from managerial judgment, but could just as easily come from statistical analysis of past data.
Assume these estimates are reasonably good; however, change them if you think it is a good idea.
Bright yellow indicates a cell you should change.
Faded yellow indicates a cell you are allowed to modify. Do this only if you have good reasons to do so.

16. The Allegro exercise: Simple sheet
Allegro Market Simple Sheet
This year (current)
Next year (projected)
Industry Sales, in Units
2,200,000
2,345,700
Company Market Share
3.0%
Price per Unit
$250
Variable Cost per Unit
$150
Gross Margin per Unit
$100
Sales Volume in Units
66,000
69,678
Sales Revenue
$16,500,000
$17,419,532
Gross Contribution Margin
$6,600,000
$6,967,813
Overhead
$3,500,000
$3,900,000
Net Contribution Margin
$3,100,000
$3,067,813
Advertising
$900,000
Sales Force and Distribution
$1,000,000
Marketing Research
$100,000
Net Profit
$1,100,000
$1,067,813
Marketing Mix Decisions

17. The profit equation
Profit = Revenues − Costs Sales Volume × Price Variable Costs Fixed Costs Industry sales × Market Share

18. Questions
Using the Simple Sheet, what happens when Allegro cuts advertising and selling effort to 0$ and raises price to $500/unit? Comment.
Repeat exercise 1 using the Smart Sheet.
Using the Smart Sheet, what is the profit maximizing level of advertising, selling effort and price? (Hint: Requires Solver) Would you recommend the firm implement this policy? Why or why not?
What if the firm's goal was not to maximize profit, but to maximize market share while maintaining profit at no lower than last year's level. (Hint: Requires Solver—and be sure to start with a feasible level of profit). Compare this policy to the one you found in the previous question.
Comment on the strengths and limitations of a response function approach (Smart sheet) like this in practice.

19. The Allegro exercise: Simple sheet (Q1)
Allegro Market Simple Sheet
This year (current)
Next year (projected)
Industry Sales, in Units
2,200,000
2,345,700 a
Company Market Share
3.0% b
Price per Unit
$250
$500 c
Variable Cost per Unit
$150 d
Gross Margin per Unit
$100
$350 e
= c - d
Sales Volume in Units
66,000
69,678 f
= a x b
Sales Revenue
$16,500,000
$34,839,064 g
= c x f
Gross Contribution Margin
$6,600,000
$24,387,345 h
= e x f
Overhead
$3,500,000
$3,900,000 i
Net Contribution Margin
$3,100,000
$20,487,345 j
= h - i
Advertising
$900,000 $0 k
Sales Force and Distribution
$1,000,000 l
Marketing Research
$100,000 m
Net Profit
$1,100,000
$20,387,345 n
= j - k - l - m
Marketing Mix Decisions

20. Questions
Using the Simple Sheet, what happens when Allegro cuts advertising and selling effort to 0$ and raises price to $500/unit? Comment.
Repeat exercise 1 using the Smart Sheet.
Using the Smart Sheet, what is the profit maximizing level of advertising, selling effort and price? (Hint: Requires Solver) Would you recommend the firm implement this policy? Why or why not?
What if the firm's goal was not to maximize profit, but to maximize market share while maintaining profit at no lower than last year's level. (Hint: Requires Solver—and be sure to start with a feasible level of profit). Compare this policy to the one you found in the previous question.
Comment on the strengths and limitations of a response function approach (Smart sheet) like this in practice.

21. The Allegro exercise: Smart sheet (Q2)
Allegro Market Smart Sheet
This year (current)
Next year (projected)
Industry Sales, in Units
2,200,000
2,345,700
Company Market Share
3.0%
0.0%
Price per Unit
$250
$500
Variable Cost per Unit
$150
Gross Margin per Unit
$100
$350
Sales Volume in Units
66,000
Sales Revenue
$16,500,000 $0
Gross Contribution Margin
$6,600,000
Overhead
$3,500,000
$3,900,000
Net Contribution Margin
$3,100,000
-$3,900,000
Advertising
$900,000
Sales Force and Distribution
$1,000,000
Marketing Research
$100,000
Net Profit
$1,100,000
-$4,000,000
Marketing Mix Decisions
Managerial Judgmental Inputs
What increase in sales will we see with a.....
...1% decrease in price?
2.20%
...1% increase in advertising?
0.2%
...1% increase in sales effort?
0.1%

22. The profit equation Profit = Revenues − Costs
Sales Volume × Price Variable Costs
Fixed Costs
(Advertising, Distribution)
(Other Fixed Costs)
Industry sales × Market Share

23. Questions
Using the Simple Sheet, what happens when Allegro cuts advertising and selling effort to 0$ and raises price to $500/unit? Comment.
Repeat exercise 1 using the Smart Sheet.
Trial and error using the Smart Sheet.
Using the Smart Sheet, what is the profit maximizing level of advertising, selling effort and price? (Hint: Requires Solver) Would you recommend the firm implement this policy? Why or why not?
What if the firm's goal was not to maximize profit, but to maximize market share while maintaining profit at no lower than last year's level. (Hint: Requires Solver—and be sure to start with a feasible level of profit). Compare this policy to the one you found in the previous question.
Comment on the strengths and limitations of a response function approach (Smart sheet) like this in practice.

24. Questions
Using the Simple Sheet, what happens when Allegro cuts advertising and selling effort to 0$ and raises price to $500/unit? Comment.
Repeat exercise 1 using the Smart Sheet.
Using the Smart Sheet, what is the profit maximizing level of advertising, selling effort and price? (Hint: Requires Solver) Would you recommend the firm implement this policy? Why or why not?
What if the firm's goal was not to maximize profit, but to maximize market share while maintaining profit at no lower than last year's level. (Hint: Requires Solver—and be sure to start with a feasible level of profit). Compare this policy to the one you found in the previous question.
Comment on the strengths and limitations of a response function approach (Smart sheet) like this in practice.

25. Using Solver for Optimization

26. The Allegro exercise: Smart sheet (Q3)
Allegro Market Smart Sheet
This year (current)
Next year (projected)
Industry Sales, in Units
2,200,000
2,345,700 a
Company Market Share
3.0%
2.7% b
Price per Unit
$250
$275 c
Variable Cost per Unit
$150 d
Gross Margin per Unit
$100
$125 e
= c - d
Sales Volume in Units
66,000
63,571 f
= a x b
Sales Revenue
$16,500,000
$17,481,989 g
= c x f
Gross Contribution Margin
$6,600,000
$7,946,358 h
= e x f
Overhead
$3,500,000
$3,900,000 i
Net Contribution Margin
$3,100,000
$4,046,358 j
= h - i
Advertising
$900,000
$1,589,271 k
Sales Force and Distribution
$1,000,000
$1,033,026 l
Marketing Research
$100,000 m
Net Profit
$1,100,000
$1,324,061 n
= j - k - l - m
Marketing Mix Decisions
Managerial Judgmental Inputs
What increase in sales will we see with a.....
...1% decrease in price?
2.20%
...1% increase in advertising?
0.2%
...1% increase in sales effort?
0.1%

27. Questions
Using the Simple Sheet, what happens when Allegro cuts advertising and selling effort to 0$ and raises price to $500/unit? Comment.
Repeat exercise 1 using the Smart Sheet.
Using the Smart Sheet, what is the profit maximizing level of advertising, selling effort and price? (Hint: Requires Solver) Would you recommend the firm implement this policy? Why or why not?
What if the firm's goal was not to maximize profit, but to maximize market share while maintaining profit at no lower than last year's level. (Hint: Requires Solver—and be sure to start with a feasible level of profit). Compare this policy to the one you found in the previous question.
Comment on the strengths and limitations of a response function approach (Smart sheet) like this in practice.

28. Using Solver for Optimization

29. The Allegro exercise: Smart sheet (Q4)
Allegro Market Smart Sheet
This year (current)
Next year (projected)
Industry Sales, in Units
2,200,000
2,345,700
Company Market Share
3.0%
3.8%
Price per Unit
$250
$244
Variable Cost per Unit
$150
Gross Margin per Unit
$100
$94
Sales Volume in Units
66,000
88,467
Sales Revenue
$16,500,000
$21,611,347
Gross Contribution Margin
$6,600,000
$8,341,344
Overhead
$3,500,000
$3,900,000
Net Contribution Margin
$3,100,000
$4,441,344
Advertising
$900,000
$1,964,533
Sales Force and Distribution
$1,000,000
$1,276,811
Marketing Research
$100,000
Net Profit
$1,100,000
Marketing Mix Decisions

30. Questions
Using the Simple Sheet, what happens when Allegro cuts advertising and selling effort to 0$ and raises price to $500/unit? Comment.
Repeat exercise 1 using the Smart Sheet.
Using the Smart Sheet, what is the profit maximizing level of advertising, selling effort and price? (Hint: Requires Solver) Would you recommend the firm implement this policy? Why or why not?
What if the firm's goal was not to maximize profit, but to maximize market share while maintaining profit at no lower than last year's level. (Hint: Requires Solver—and be sure to start with a feasible level of profit). Compare this policy to the one you found in the previous question.
Comment on the strengths and limitations of a response function approach (Smart sheet) like this in practice.